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How private marketplaces actually work

By Eric Picard (Originally Published on iMedia – December 13, 2014)

Recently Ricardo Bilton wrote an article for Digiday about the difficulties that publishers have had embracing private marketplaces (PMPs). The validity of his article is arguable, and he called out a few of the buy-side platforms as causing some of the difficulty — despite the massive and growing volumes those platforms are actually driving in the PMP world. So instead of rebutting his article, let me define how these things work, and what the scope and difficulties are in making use of private marketplaces, but also what benefits can come from them.

Before we get into it, let’s talk about complex vs. complicated. They actually mean different things. Complex implies that the difficulty of embracing something is unavoidable — some things are just complex, have lots of moving parts and lots of opportunities to implement. Complicated implies that the difficulty is avoidable, and could be designed around. Private marketplaces today are both complex and complicated. We need to remove the complications.

History

Back in the dark ages of the programmatic world, let’s say 2008, publishers were wary of the newly emerging programmatic landscape. In order to convince them to put their inventory into the proto-exchanges that existed, the concept of a private exchange or private marketplace evolved. Keep in mind that up to that point, mostly the inventory that flowed on the exchanges came from ad networks daisy-chaining their inventory together. But as publishers began participating, and SSPs entered the scene, these private marketplace mechanisms were rolled out to support publisher concerns about yield optimization — and especially cherry picking and cream skimming — buying strategies that were major concerns for publishers in those early days.

As a result, the first private marketplaces were fairly simple to understand, and were nice ways for publishers to get their feet (or at least their toes) wet in the programmatic space. The basic concept was simple: Publishers could expose some or their entire inventory to an exchange or SSP. They could hand-pick which advertisers were invited to come into the private marketplace. Only those invited to have access could bid on the inventory.

The problem with this early approach was that it missed out on some very important fundamentals of exchange-based buying and selling. One important fundamental is bid density: For every impression that is exposed to an auction, you need as many bidders (buyers) as possible competing for that inventory in order to have the price reach a reasonable amount — especially in a second price auction.

What is a second price auction?

It’s a pretty simple idea, really — if three people participate in a second price auction for an Apple, all three people put in the highest price they’re willing to pay for that apple. Person A bids $1.00. Person B bids $1.50. Person C bids $0.50. Person B would win the auction, but only pay $1.01 for the Apple. The reason for a second price auction rather than a first price auction (in the example above for a first price auction, person B would still win, but would pay $1.50) is to encourage the bidder to put their true price into the auction. Second price auctions are generally understood to have less “gaming” of the auction — since the high bidder is protected from overpaying.

But in a world where only one or two advertisers are bidding on the same impression, there’s often no second price to use. So private marketplaces by nature are problematic when it comes to bid density — and many early private marketplaces ultimately failed to succeed. There are mechanisms that can be tried — for instance using a first price auction for private marketplaces — but of course this can lead to rampant gaming of the auction — and rarely will a buyer put the actual price they’re willing to pay into a first price auction. Another mechanism is price floors –which protect the publisher from having the impression fall on the floor for close to nothing — but often a PMP price floor in those days became a price, rather than a floor due to the lack of bid density.

As our industry evolved away from the original exchanges and toward real-time bidding, a whole host of new complex issues were uncovered — but also amazing new capabilities. One of the key things that this drove in the PMP world were new innovations like dynamic floor pricing — where the SSP or even the publisher ad server was able to analyze demand across the ad server, the SSP, the PMP, and the open exchange and set the floor on a per-impression basis.

As publishers got over their initial fear of programmatic selling, they began to put their inventory into the open exchange and blend the private and open bids into the same auction. Publishers quickly realized that they needed to give the buyers that had private marketplace access a set of preferences so that they would continue in the PMP rather than bounce out to the exchange. This led to all kinds of mechanisms — across various systems that have brought us to our modern programmatic landscape for private marketplaces.

Private marketplaces today

Private marketplaces today are very confusing. They’re both complex and complicated. There’s no clear and simple definition of a PMP that means exactly the same thing to everyone because there are so many ways to implement one. And depending on your ad server, your choice of SSP and/or exchange, and the buyer’s DSP, it’s fairly impossible to know in advance how the PMP will instantiate itself. Literally if you took five impressions of a PMP and reviewed them, each could be delivered completely differently from the others.

For publishers looking to start using private marketplaces today — without any legacy configurations or expectations, there are some benefits of having waited. Today PMPs are really about giving the publisher control over the way their preferred customers get treated by the auction. As everyone knows, when you have a big customer, who spends a large amount with you annually, you probably want to give them some discounts and benefits for working with you. Private marketplaces today are evolving into sets of controls for protecting the relationship with the buyer, and often for giving them either a discount, or giving them better access and control over the inventory they want to buy. It is the latter scenario — giving the buyer control — that makes some publishers very nervous, but is the real benefit of the PMP in today’s market.

In this scenario, the publisher lets their big spending customers get some additional control over defining the audience and the inventory that they have access to. Sellers frequently will bundle this additional control with a larger overall buy, or with a high minimum CPM, or with a high minimum overall budget. And publishers are finding that this approach makes everyone on all sides of the deal much happier. Everyone wins, as long as the complexity required to pull this off is embraced.

One of the biggest innovations in the programmatic world, and one that causes a lot of the complexity behind the issues this space has been saddled with, is the Deal ID. Deal ID was supposed to solve many problems in the programmatic space, but they have added another layer of complexity. The trick is to embrace the complexity without structuring things in such a way that they become unnecessarily complicated.

What is deal ID?

It became clear that while RTB was a vastly superior way to buy and sell ads than anything else we’d seen as an industry — there were touch-points between the old systems and the new systems that were confusing. Nowhere was this confusion worse than when a buyer wanted to execute a guaranteed deal over the RTB infrastructure.

But that Deal ID mechanism has now been used in much more flexible ways than its original driving intent. Think of a Deal ID as a way to prioritize a buy against supply. And the features for how you prioritize the bid vary by ad server, by exchange, by DSP, and by SSP. Sometimes the combination of each of those things leads to a different set of capabilities.

Advertiser A sets up a dynamic bid that lands at $5 for the impression. Publisher floor prices this advertiser at $7.

Advertiser B sets a dynamic bid at $6 for the impression. Publisher floor prices this advertiser at $4.

Advertiser C sets up a dynamic bid for $17 for the impression. Publisher floor prices this advertiser at $20.

Advertiser D sets up a dynamic bid for $1 for the impression. Publisher floor prices this advertiser at $3.

In the above scenario, Advertiser B would win the auction, and pay $6 CPMs for that impression. Since one of the Deal ID bids won the auction, the impression never makes it to the open exchange. If for some reason the publisher had set the floor price for advertiser B at $7, then this auction would have flowed through to open exchange, and then advertiser C would have likely won the auction (assuming nobody in the open exchange bid higher than $17). Advertiser C would end up paying whatever the next highest bidder was willing to pay, plus $0.01.

How was that for complex? Want it to be more complex?

Some ad platforms can support a Deal ID with a dynamic bid, or a fixed price with a priority cascade. So while price mattered a lot in the example above, if one of those bids (even the low bid) was a fixed price, it would have won the auction at the fixed price. That’s how you give your preferred advertisers ways to find their preferred audience while giving them a fixed price. The trick is to negotiate well on the price on both sides so everyone gets what they want.

So while Deal ID is just one mechanism that may or may-not be part of a private marketplace, the two concepts are becoming somewhat inextricably linked together. What is a private marketplace today? It’s a complex set of interacting tools, systems, mechanisms, and approaches that can be used to give the publisher control over the prioritization of their supply against the demand represented over the exchange. Easy to understand? No. Easy to configure? No. Easy to execute against? Not yet. But worth using? Absolutely!

This complexity means power, but the complexity leads to confusion and complications. So when we have people who aren’t practitioners writing articles about very complex systems and how they are used, and then going to sources for quotes about adoption of these complicated scenarios, the answer is going to either be vague (not quotable) or clear (not accurate.) And these clearer quotes, which aren’t really very accurate in many cases, paint a picture of the space that looks like it isn’t working.

Private marketplaces give publishers control over the prioritization of buys coming from the programmatic channel. As an industry, we’re still figuring private marketplaces out — but vast and growing dollars are being spent over them in the meantime, and those buyers and sellers willing to take the time and effort to understand the complexity are winning. Yes, we need to make the execution of private marketplaces less complicated. It would be nice if we could also make them less complex, but only if we don’t lose the power that comes with the complexity. And in the meantime, the channel is growing and productive.